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Private Equity Market Landscape – First Quarter 2014

The year of 2013 has been the most successful year for private equity firms since 2008, with 873 funds with an aggregate of $454 billion. In 2013, the private equity-backed buyout market was particularly strong; a total of 1,348 buyout exits were valued at $303 billion.

Global merger and acquisition activity was dominated by a number of large transactions, including competing bids for Time Warner Cable and SFR, the French telecommunications company. According to Thomson Reuters, the overall value of transactions increased by 54%, while the number of deals declined by 14%. For the quarter, approximately half of the deal-making activity occurred in the US, while the biggest jump in activity occurred in France, mainly due to transactions involving SFR and L’Oreal. During the period, investors seemed to take a positive view of M&A activity. The improving liquidity for investors has increased their capacity for making new commitments to private equity funds.

As for venture capital, 5,979 venture capital deals valued at $46 billion, and 798 deals exited during the period. Private equity has outperformed the public markets over the longer term, as indicated by the Venture Economics universe. Investors are becoming more cautious about how industry regulation will affect their investment portfolios; investor preferences have also become more risk averse. Overall, investor appetite for private equity in 2014 remains high.

This year has seen an increase in the average size of funds being raised by GPs. LPs are investing more of their capital with managers that have extensive track records, and therefore, raising much larger funds. First-time managers only accounted for 7% of the capital raised. In another word, investors are being very selective in their commitments. There is clear evidence of a decline in interest for emerging fund managers as well as first-time funds.

The private equity market of the first quarter 2014 was a continuation of the themes that defined the latter part of 2013. According to data from PitchBook, there was $108 billion in U.S. private equity deals across 589 transactions. Spurred by investors’ desire to funnel growth and invest the stockpiles of cash that have accumulated over the last few years, corporate acquirers have been a key driver of deal activity during the past quarter. The momentum generated by corporate acquirers and resilient capital markets has continued to drive valuations upward, forcing sponsors to go outside of the traditional buyout realm and look to more nontraditional forms of execution.

Despite a rebound in European deal activity in 2013, global private equity buyout activity remains bifurcated. According to data from Preqin, global buyout deal volume rose 30% in Q1 2014 versus the previous quarter. Notwithstanding this uptick in volume, the global number of deals decreased by 97 over this same time period. Given the saturation of developed markets such as the U.S. and Europe, investors and firms have focused more attention on emerging and frontier markets in their search for new sources of deal activity and investment returns.

At the sector level, healthcare continues to be an attractive area for private equity investment as the landscape evolves, although new regulatory challenges within healthcare and payer pressures continue to cause changes in private equity investment. Within the healthcare industries, there were no mega-deals in 2013 and buyout deal value was down 23% despite a small increase in deal count. In their search for returns in 2013, investors were increasingly willing to invest in earlier-stage assets.

Geographically, North America and Europe continue to lead investment activity within healthcare private equity, with North American targets accounting for seven out of the top 10 deals in 2013. However, growth in activity in Asia-Pacific and the rest of the world outpaced these regions.